Judicial Oversight of Remedy Stipulation

• Author: Jamie Cassels/Elizabeth Adjin-Tettey
• Profession: Professor of Law, Vice President Academic, and Provost, University of Victoria/Professor of Law, University of Victoria
• Pages: 452-468

CHA PTER 14

JUDICIAL OVERSIGHT OF

REMEDY STIPULATION

A. INTRODUCTION

1) Remedy Stipulation and Liquidated Damages

It is not uncommon, in both tort and contract ca ses, to f‌i nd that t he

parties have sought in advance to specify an amount of damages for

breach of duty. Exclusion clauses a nd lim itation clauses contained in

written agreements and in posted notices frequently seek to limit both

liability and the amount of damages that may be cla imed for tort or

breach of contract. These clauses are inserted for the benef‌it of the

breaching party. Conversely, contract s someti mes conta in “liquidated

damages” provisions that specif y a f‌ixed amount of damages for breach

and are generally included for the benef‌it of the plaintiff. Other clauses,

such as “acceleration clauses” and clauses providing for forfeitures of

deposits, al so ser ve to stipulate t he remedy. The e ssential question in

any case is whether or not the courts w ill en force the st ipulated rem-

edy at the suit of the plaintiff upon breach. Exclusion clauses a re con-

trolled by the substantive law of contract regarding notice of terms and

unconscionability. As such, they w ill not be dealt with here. In stead,

this chapter is concerned with stipulated damages provisions, gener-

ally called “liquidated dam ages.”

452

Judicial Over sight of Remedy Stipulation 453

2) The Advantages and Disadvantages of Stipulated

Damages

There are many advantages to permitt ing parties to stipulate t he dam-

ages upon breach of contract. In situations where d amages will be dif-

f‌icult to prove, they provide a form of insurance to the parties that i n

the event of breach their losses will be fully recompensed. They reduce

“judicial risk,” reduce the diff‌iculty and cost of proving dam ages, and

achieve savings for both the p arties a nd the judicial system. The pr in-

ciple of freedom of contract weighs in favour of permitting a wide scope

for liquidated damages clauses. The par ties know best what is at stake

in the transaction and how to arrange their affairs. E ach enters into

the agreement with her eyes open, know ing what the consequence of

breach will be.

Despite these arguments in favour of stipulated damages, there

are competing principles at play, i ncluding the law’s desire to protect

weaker parties and its dislike of penalties and punitive damages. These

considerations suggest that courts should police stipulated damages

clauses carefully. Stipulated damages prov isions will often appear to

be punitive or coercive. The law of contract rarely per mits punitive

damages or speci f‌ic performance, and t he question is whether the par-

ties should be permitted to agree between thems elves to a result that a

court would not consider appropriate. Moreover, such clauses may be

an ind ication of overbearing by one par ty and t hus raise the issue of

unconscionabilit y.

B. LIQUIDATED DAM AGES AND PENALTIES

1) Basic Concepts

The most common way of stipulating a remedy is to include in a contract

a clause requiring that a f‌ixed sum be payable for breach. Historically,

such provisions, aimed at secur ing perform ance of a contract, took the

form of penal bonds and penal clauses.1 Penal bonds were instruments

under which one party promised to pay the other a sum of money. The

bond would be void only if the promisee performed a certain act. Penal

clauses were included in the contractual i nstrument itself. Courts of

equi ty, however, p rovided relief a gainst bonds a nd forfeit ures, a nd legi s-

1 S.M. Waddam s, The Law of Damages, 2d ed., looseleaf (Aurora, ON: Can ada Law

Book, 1991–) at para. 8.40.